What is the cash conversion cycle?
How do you calculate the cash conversion cycle?
Three parts.
- Days inventory outstanding (DIO). How many days stock sits before it sells.
- Days sales outstanding (DSO). How many days pass between a sale and the money arriving. A card payment that pays out quickly is a short wait. A wholesale invoice can be a long one.
- Days payables outstanding (DPO). How many days you take to pay suppliers. This one is subtracted, because it is time when the supplier is funding you.
CCC = DIO + DSO − DPO.
Why does it matter for ad spend?
More ad spend means more orders. More orders mean you buy more stock. You pay for that stock before the sales money returns. So growth can eat cash even when each order makes money.
That is why accounting profit and cash in the bank can disagree. The profit shows up on paper. The cash is still in the warehouse.
A longer cycle needs more cash to fund the same growth, as one ecommerce vendor puts it1. A shorter one needs less. This is part of what we mean by following the money all the way to the bank.
For ZFD: Before spend is scaled, we think the first question is what it does to stock and how many days the cash is tied up. The margin side starts with contribution margin. The time side is payback period.
Worked example
Easily confused with
Cash conversion cycle vs Payback period
How long a customer's margin takes to repay what it cost to acquire them. CCC is about stock and payments, not customers.
Cash conversion cycle vs Contribution margin
What is left per order after variable costs. It says nothing about timing.
Cash conversion cycle vs LTV
What a customer is worth over time. A value, not a delay.
Cash conversion cycle vs Profit
A figure on paper. CCC is about when cash moves.
FAQ
Is a shorter cash conversion cycle better?
Usually yes for cash. Less cash is tied up. Your own stock, payment and supplier terms decide what is realistic.
Can the cycle be negative?
Yes. It happens when stock sells and customers pay before suppliers are paid. Then the business is funded by its suppliers. A vendor article calls this the best case, and a rare one1.
Is this an advertising metric?
No. It is a finance metric. Ad spend changes it, because spend changes how much stock you carry.
Sources
Let’s find what’s actually working.
Next step. Start with how your ad numbers look on explicit assumptions. Use the Is your ROAS real? calculator.